What Is A Subprime Borrower?
A subprime borrower is an individual or loan borrower with high credit risk.
Borrowers who have low credit scores and negatively marked credit reports (account rejections, delinquencies, settlement, etc.) appear on the list.
Such borrowers come with a credit history that is less than required.
Their credit score is mostly below 670. Due to such negative marks, borrowers find it difficult to obtain loans from the lenders and are charged with increased interest rates.
How Do Subprime Auto Loans Work?
There’s no particular credit score ascribed to these borrowers, yet, the average credit score for a subprime auto loan ranges from 451 to 599. Here’s how the auto loan works:
- The borrower might have to provide the auto-loan lender with pay stubs or other forms, like a 1099 form or a W-2 form, as income proof
- If valid income proof isn’t available, the borrower needs to submit bank statements from which the cash history of the individual can be determined
- When it comes to subprime loan rates, it’s advisable to shop around for better rates as every lender comes with different criteria and chargeable fees
- Car loans in this category can be precipitous compared to other standard car loans on the market, as lenders can recuperate the cost of the payments
- The lender considers the payment history, credit utilization, and credit history length to determine the actual credit score of the borrower
- These auto loans have strict requirements and terms
- It comes with longer repayment options or plans which ranges from 5 to 8 years
- Upon missing any payment of the car, the lender is free to take legal action, such as repossessing the car
Car dealers are currently looking for borrowers with a limited credit score as this adds to their sales volume. This is why subprime auto loans are gaining popularity among borrowers. However, it’s still advisable to look for the best rate and compare it with standard loans.
Examples
Interest rates will vary according to the lender, vehicle type, and loan term. The average auto loan rates for July 2020 are as follows:
(Source: https://cars.usnews.com/cars-trucks/average-auto-loan-interest-rates)
For New Car Loan:
- 750 or higher credit score – 4.78%
- 700 to 749 credit score – 5.01%
- 600 to 699 credit score – 7.11%
- 451 to 599 credit score – 18.77%
For Used Car loan:
- 750 or higher credit score – 5.03%
- 700 to 749 credit score – 5.26%
- 600 to 699 credit score – 6.69%
- 451 to 599 credit score – 11.44%
So, if you finance $20,000 from a lender for 5 years, you’ll pay $30,977. However, if you’ve had a good credit score, you would’ve paid $22,525 and saved $8,452.
Thus, a subprime loan means you’ll pay thousands of dollars more than the car’s worth.
Alternatives
If you’re not ready to get this type of auto loan, there are other alternatives you can look for.
- The first alternative is to improve your credit score. Start working on your credit history and correct it before checking out auto loan plans in the market
- Improve errors and other negative marks on your credit report to raise your credit score
- Look for community banks and credit unions that offer second-chance borrowing plans to borrowers with poor credit history
- Appoint an eligible family member or friend, in the form of a co-signer, to share the benefits and risks associated with the loan
If you meet the criteria and are being offered competitive rates, refinancing is another option that you can consider.
Conclusion
If you’re a subprime borrower (451 -599 credit score), you’ll have a tough time finding a lender. When you do, they’ll charge you an extremely high-interest rate that’ll add thousands of dollars to the actual cost of the car.
Consider the alternatives mentioned above before accepting a subprime auto loan and you’ll be able to save a lot of money.
